H-P investors ignore dour view on Wall Street

Commentary: Whitman needs to keep momentum on restructuring

SAN FRANCISCO (MarketWatch) — As Hewlett-Packard Co. prepares to post quarterly results on Wednesday, disappointing results from Dell Inc. and recent market research data on falling PC sales loom like a dark cloud.

Bloomberg News

Hewlett-Packard CEO Meg Whitman faces a downbeat mood on Wall Street, but investors have still sent the tech giant’s shares up more than 80% over the last six months.

However, that has barely dampened the mood among investors who have sent the shares of the troubled tech giant surging by a stunning 80% over the last six months — making H-P
HPQ, -0.33%
the best performing by far among large-cap tech stocks, as well as the best performing Dow
DJIA, -0.32%
component since the first of the year.

H-P’s investor base has also ignored the downbeat mood of Wall Street analysts, most of whom have advised investors to avoid buying the stock, or dump it altogether. Only 12% of covering brokers currently rate the stock as a buy, according to Thomson Reuters.

That split in sentiment may be the result of wide-scale changes being pushed by CEO Meg Whitman, who took over the top job at the firm in September 2011.

“Whitman has come in like a breath of fresh air,” said Rob Enderle, principal analyst at the Enderle Group. “Morale is up and you don’t get the sense that everyone is out looking for new jobs.”

For the second fiscal quarter being reported on Wednesday, H-P’s overall revenue is likely to be hurt by weaker sales in its personal systems business, as Microsoft’s
MSFT, -0.38%
Windows 8 is not driving a sales boom as many had hoped.

H-P has also not yet named a replacement for Ray Lane, who resigned as chairman in April but remains on the board after the company’s last annual meeting, where he got 55% of shareholder votes for re-election. Investors are not yet expecting a chairman to be named on Wednesday, but some academics have predicted that Whitman eventually could be named to the post.

It’s been over a year and a half since Whitman took on the daunting CEO task. So far, she has mostly laid low, focusing on the job at hand — restructuring the technology giant — while navigating a few seismic industry shifts, trying to figure out where H-P should make its biggest bets.

Whitman may not be an engineer or have the tech cred that some of the newer CEOs at other Silicon Valley giants can tout, such as Marissa Mayer at Yahoo Inc. or Brian Krzanich at Intel Corp. But so far, some believe morale has improved at the company, compared to the lows it saw during the tenures of its three prior leaders, all of whom also came from outside the company: Leo Apotheker, Mark Hurd and Carly Fiorina.

It also looks like Whitman is trying to reinvest in innovation, something all of her predecessors claimed they were doing but did not ultimately have that much to show for their efforts. At a Morgan Stanley Technology Conference in February, Whitman said she increased research and development spending, and especially focused on getting some products out the door.

“I increased R&D spending and basically focused the R&D efforts and said we’ve got to get these products that were close to market to market fast,” Whitman said.

Some new products she said were accelerated included a next-generation server in H-P’s ProLiant product line called the Gen8 in February, with more self managing functions for data centers, and Moonshot, a low-power consuming server, using the same processors that power smartphones and mobile devices, in early April. H-P’s second quarter ended April 30, so the response to some of these new products may be discussed on the quarterly conference call with analysts.

“We expect several hundred million dollars of revenue shortfall in the PC and enterprise segments, supported by industry data, our proprietary checks, and competitor results,” wrote Raymond James analyst Brian Alexander, in a note on Monday. “Hardware profitability should remain pressured by revenue declines and aggressive pricing, but we are encouraged by recent product innovation in servers and storage.”

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Another area where H-P lags but is still trying to catch up in is mobile, especially in tablet computing.

“When I showed up in September 2011, we were nowhere on mobility,” Whitman told the Morgan conference. The Palm acquisition, begun under Hurd but gutted by Apotheker, was “a little detour to nowhere” she said. The quarter may provide an update on how H-P’s ElitePad, a tablet for corporate users, is faring, along with its first Android-based tablet, the H-P Slate 7, which has gotten at best, mediocre reviews.

The company’s three-year cost cutting program is still underway, and investors will look for progress, in which H-P is seeking to eliminate about 30,000 employees from its worldwide workforce.

In addition, its balance sheet remains challenged, after the company over-spent on some of its most recent acquisitions including Autonomy.

H-P continues to be a work in progress. Whether Whitman can get more innovation out of the company that leads to actual growth, during one of the most challenging times in tech, remains the biggest question of all.

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